Groser: Address to Wellington Chamber of Commerce

In the past few weeks, I have been part of a team focused overwhelmingly on the short-term management of the risks arising from a possible breach in our proud food safety record. It has been an extraordinary whole of Government response, involving many Ministers …

Hon Tim Groser
Minister of Trade

28 August 2013
Address to Wellington Chamber of Commerce

Mac’s Function Centre Taranaki Street

In the past few weeks, I have been part of a team focused overwhelmingly on the short-term management of the risks arising from a possible breach in our proud food safety record. It has been an extraordinary whole of Government response, involving many Ministers from the Prime Minister down, multiple agencies and working closely with a number of commercial players.

As you will be well aware, our overwhelming – I would almost say sole – focus has been on the human health issue: trace the potentially contaminated product, identify it, get it out of the supply chain in the markets concerned. As will become apparent when the Acting Chief Executive of MPI issues a comprehensive report later today – and I will put it very simply – that first part of the job has been done.

I will not elaborate. Read the report. It will speak for itself. But in doing so, please be conscious that this is not the end of the process. There will be a range of inquiries yet to come of which we expect the Ministerial Inquiry will be the most authoritative. Actions will flow from these reports, to be sure. But let’s wait and see precisely what happened, what went wrong and why before rushing to conclusions about what those actions should be. If not, you might end up ‘fixing’ the wrong problem.

The longer term economic risks to our trade have always been in the back of our minds of course, but I am sure you will understand that this has had to take second place to the first order human health issue.

In any event, it has always been clear that the way NZ Inc would be seen responding to the immediate issue would be a very large part of any long term solution aimed at the underlying economic issue – our reputation. Discussions I had in Brunei last week with a range of Trade or Commerce Ministers, including China’s, underlined how closely the Government’s response is being monitored. Mr McCully’s parallel discussions in Beijing, also last week, lead to exactly the same conclusion.

I will be quite discreet here: with respect to the all-important relationship with China, we are in a good position. The NZ/China relationship remains in very good shape – nothing has changed since the extraordinarily positive visit of the Prime Minister, accompanied by the huge NZ delegation in March. But the questions their Ministers have are exactly the questions NZ Ministers have. The purpose of the Ministerial Inquiry is to find the answers to those common questions.

In the market place, some damage has been done, and we are not in clear and calm water yet. Some companies, particularly those without heavyweight balance sheets, are unquestionably feeling the pressure. The Government is very conscious of that and we are developing with the smaller commercial players – many of whom would be considered significant NZ companies but for the comparison with Fonterra, the only Fortune 500 company we have – a strategy to deal with their very real problems. There is a whole range of discussions underway – technical, political and commercial – addressing related but often quite distinct aspects of the problem, some of which (the administrative mistakes over meat certification to China for example) have absolutely nothing to do with food safety but which are part of the mix.

I have said on many an occasion that the least we can expect, metaphorically speaking, is a bloody nose. But frankly, while I know it will take a lot of further hard work and some re-calibration here and there, I am optimistic we will indeed recover from this and fully. As the Prime Minister has said, we have over 100 years of an unmatchable international record of putting high quality, safe food on the tables of families around the world. That did not disappear overnight.

Learning About Our Customers

This has been a sharp lesson in risk management but we do not need to wait for any Inquiry to know that NZ Inc – not just Government agencies but companies and other actors – needs to lift our game in the emerging markets that are our economic future.

We are seeing explosive growth, and some, though certainly not all, of the recent problems arise directly from that explosive growth. Our sheep-meat exports to China, for example, expanded in the last twelve months from under $250 million to over $550 million. Already China has moved from our fourth market to overtaking Europe as our largest market and it has taken one year to do it. There is nothing in our trading history like that.

It took our predecessors decades to build our old supply chains into the Anglo-Saxon dominated trading world of the second half of the 20th Century. Furthermore, in the past we obviously had no deep problems in understanding our ‘customers’, given the strong cultural linkages. Well, as we enter the second decade of the 21st Century, it should already be clear that is a very new order of things.

Generally, one could say it is time for NZ inc to drop what I and many other analysts have called a ‘purely transactional approach’ to trade with the emerging economies. There are some fantastic people and NZ companies already in that space, investing in the broad infrastructure, including HR infrastructure, necessary to deal in these markets long-term. We just need more of it. And frankly, in certain other quarters, and partly as a consequence of these recent set-backs, I already can see the penny has dropped. Years of training as a diplomat prevent me being specific.

In common with much of life, building an export-focused economy is about creating opportunities, exploiting them while managing risk. So allow me now, if you will, to push this theme forward well beyond this immediate first order matter and look at this from a much broader and longer-term perspective. Consider this my stock take of where we stand.

The Goal: Increasing Our Export Orientation

First, let’s consider the goal. There is the formal numeric goal – to increase the ratio of exports to GDP by around ten percentage points to 40% of GDP by 2025. Informally, the Prime Minister has put it more bluntly: ‘We are not going to get richer by selling to ourselves’.

Since the numeric goal is expressed in terms of GDP, we have to make some assumptions about the likely growth rate of GDP to reveal the compound average nominal growth rate in exports required. This is a breakfast speech so I will spare you the arithmetic. Take it from me; on the basis of plausible projections of GP growth, it requires us to grow our exports of goods and services between around 6.5 to 7.5% on average per annum for the next 12 years.

That’s tough, but we have done it before over a comparable period. In the 11 years 1990 to 2001 we averaged annual nominal export growth of 7.6% – the top end of the range we need today to meet our 2025 target.

Now we have to accept that for much of that period in the 1990s we had two favourable trends going for us that are not in play right now. That is, global growth was strong in the 1990s and we had a rather more favourable exchange rate on average during that period. In the last five years, we have had exactly the opposite – the worst international recession for 70 years, particularly savage in our traditional developed country markets, and a very high exchange rate.

Despite that, during that five year period 2008 to 2013, our exports of goods – that means in plain language exports of ‘stuff’ or ‘things’ from Icebreaker tee-shirts to milk powder – has grown 4% on average. Our services exports, dominated by tourism and education, have been really badly affected by the international slow-down and high exchange rate. They have grown by just 0.6%. Actually, there is a fascinating shift taking place in the composition of our services exports. It is a classic sweet and sour dish. I will come to this later.

Overall, if our exports of goods and services continued to grow on the basis of the longer-term historical performance of the last decade, we calculate that by 2025 we would be $20 to $25 billion short of the 40% target. Alternatively expressed, we are about 75% of the way to our long-term target. So it is far from hopeless, but we are clearly going to have to stretch to increase our collective work rate.

I am your classic ‘glass half-full’ guy. I want to spend the rest of my time with you today explaining to you why I think this target is not beyond us. To see this, it is necessary to do a little ‘data-mining’ and look at some of the deeper drivers internationally and domestically that I think are working overwhelmingly in NZ’s favour.

Recent Headwinds: Exchange Rate and Global Financial Crisis

First, let’s deal with the exchange rate one of the major headwinds we have had to confront in our export drive.

I am not in Parliament, so I can use un-parliamentary language. There is so much twaddle spoken about this matter and for all manner of reasons. As the distinguished magazine, The Economist, put it acerbically, compared to the gigantic size of international capital markets, the NZ Reserve Bank is armed with a pea-shooter. It can intervene from time to time to take the top of a rally, but the idea of returning to the old policy disaster of trying to ‘manage’ the exchange rate and which we abandoned in chaos in 1984 would be just that – a disaster. I don’t believe for a minute the Labour Party, if they became the Government, would be stupid enough to attempt this, in spite of their current rhetoric. They have a history of nine years in office of rejecting this absurd idea.

Our dollar is high fundamentally for two reasons: first, and most important, because interest rates in the giant developed countries are near zero. Richard Fisher, President of the Federal Reserve of Dallas, pointed out recently that the cost of money in the United States is currently the lowest for 237 years.

It is not only inevitable, but highly desirable, that the US will indeed taper off quantitative easing when the underlying macro-economic conditions allow. Speculation that we may be at the first stages of this painful but necessary re-calibration of US monetary policy have already had some favourable impact on our cross-rate with the US dollar. When the United States and Europe slowly engineer a pathway away from unprecedentedly loose monetary policy this will, other things being equal, take pressure off our exchange rate.

The second, and intuitively I believe much less important factor, is that NZ is doing very well internationally by comparative terms. This is well understood in international capital markets. Let us deal with one fallacy – that a vote for your currency is bad, and a vote against your currency is a great sign. The currencies in free-fall around the world are the currencies in failing economies. To an extent, our relatively high dollar is a price of relative success.

So, what does this mean for our export future over the next decade or so to 2025? Well I am not a soothsayer, but I would regard it as the height of pessimism to believe that the unprecedented monetary policy frameworks of today – recall Fisher’s point that this is the cheapest money for 237 years – will last through that period. That just seems to me highly improbable.

I think the US will slowly climb out of this serious recession and although the evidence is far more fragile in Europe, there are already some positive signs of a turn-around in the three largest European economies, led by Germany. So, given that the largest factors weighing against our export drive in the last 5 years have been the worst recession in 70 years and the high, some would say overvalued, exchange rate, my own intuition is that is highly probable we will see relief on both fronts over the next ten years of so. That has to help.

Data-Mining: Uncovering Export Gems

Averages and aggregate figures, while essential for analysis, often obscure what is going on just below the surface. And let me tell you this, there is a heap of things going on below the surface of our export performance that give me a lot of encouragement.

First, and putting aside as I did at the start of my speech the current major setback to our food exports arising from potential contamination of a tiny batch of whey protein concentrate, all the key long-term structural international trends are moving in our direction, creating the conditions for an enhanced export performance.

You will be familiar with the main lines of argument here. Basically, 30 or so years ago we sold our products to the developed, and predominantly Anglo-Saxon, world. Why? Because that was where most of the people with the discretionary income to buy our high quality products lived.

It is completely different today and you ain’t seen nothing yet. Today, there is an estimated 500 million middle class in the emerging economies and this is projected to multiply by a factor of six to some 3.2 billion by 2030 – a mere decade and a half away.

China: Our Special Focus

China is by far the most important of these emerging economies. China’s economy is starting its historic shift to a more consumption and service-driven model that will favour household income growth and probably a faster rate of growth of the soft commodities NZ produces so competitively.

There is a huge amount of international commentary around the slowing down of China’s growth rates. Well, sure: China’s growth rates may well be less than the 9-10% rates of the last 30 years. But you have to understand something basic about political economy analysts: there is a huge in-built bias towards the pessimists. Basically, people like to be scared by apparently well-informed doomsday scenarios from so-called experts. You will never make a living on the after-dinner rubber chicken speaking circuit with a theme of ‘I think things will work out fine’. Far better to thrill and scare the punters with speech titles like ‘Why the False Paradise is about to collapse around us and what the Government should be doing to prepare you for collapse’.

At the most basic level, the wealth of pessimism around this well-known phenomenon of ‘slowing growth rates in China’ seems to me to be fundamentally innumerate. What matters to NZ, what matters to the Chinese people and to others wishing to trade with them is the additional increment of GDP the growth process delivers year by year. Well, the Chinese economy today is about US$7 trillion. Ten years ago it was half that – $3.5 trillion. 7% of $7 trillion is US$490 billion additional income each year; 10% growth on the back of a $3.5 trillion economy delivered a growth increment of US$350 billion ten years ago – a far smaller increment. I am forever amazed this never seems to emerge in the welter of professional analysis around this matter.

Let me be more precise. In 2000, research indicates 4% of Chinese households were ‘middle income’ (defined as between US$9,000 and $34,000 per annum). This figure is expected to be 75% of households in ten years’ time. Buckle your trading seat belts. Recall the explosion of our sheep meat exports in the last 12 months. This is a massive opportunity.

Second, not only are income levels in these economies going to drive our export growth, but we have only recently had the FTA platforms in place to allow us far better access to their consumers. Europe always had the income levels to sustain a vastly superior export performance from NZ.

But massive protectionism in Europe squeezed us out of their market – we even had to go along with a humiliating trade deal in 1973 based on the euphemism of ‘degressivity’ – that is a Treaty level obligation pursuant to Protocol 18 of the UK Accession that each year NZ would export less and less to our traditional European markets. We finally stopped that pernicious concept in its tracks with the negotiated settlements in the last successful multilateral negotiations – the Uruguay Round. That experience is etched forever on my mind since I had to live with it in Geneva for seven years throughout that negotiation until we settled it.

This again suggests to me that it is entirely plausible to believe we can increase our export performance over the next 12 years to 2025. This country historically has been throttled by protectionism over our main food and beverage exports. That is no longer a factor.

As a result of the extraordinary strategic successes in our trade policy, this is all changed. And it will get better. We have just signed a comprehensive economic cooperation agreement with the economy of Taiwan – the 12th largest trading entity in the world. We will have duty free trade cover around 98% of our exports within four years. Only New Zealand has it. TPP – now bigger than King Kong with the addition of Japan, Canada and Mexico – will produce new opportunities to the immense dismay of the small but vocal anti-trade lobby in New Zealand.

Furthermore, we know that a significant number of our exporters are not fully utilising our FTA deals. To put it bluntly: we are leaving a lot of money on the table. We have a strategy to deal with this, but it will take a bit of time.

Our Food and Beverage Exports: What is Happening Below the Surface

This is not some piece of wishful thinking. It is already showing up in our export figures, once you mine the data below the aggregate level.

The first thing you would expect is for improved performance to show up in our largest goods sector – food and beverage exports. You will recall we need to average annual export growth between 6.5% to 7.5%. In food and beverage, we are well ahead of the play – in the last 15 years, our food and beverage exports grew at a compound annual rate of 8.3% per annum.

That is a great story. But mine deeper into the data and you uncover another, better export gem. It is about transition – transition away from lower value, more ‘commoditised’ agriculture products to higher value, and more sophisticated products.

The evidence for this exists on multiple levels. Even within a ‘pure’ agriculture commodity export sector such as sheep meat, there has been a massive shift away from bulk frozen carcasses towards. In 1970, 90% of our sheep meat exports were frozen carcasses. Today the figure is less than 3%. In dairy, infant formula is growing at a compound average growth rate of 38% – hence the stakes involved in sorting out the current deep problem.

But more interesting still is the rise of processed food exports. These are products like jams and jellies, frozen French fries, soups, sauces, pasta products, cereal and muesli, biscuits, ice-creams, nutraceuticals, pet food.

In 2001 total exports of processed foods were $420m; ten years later they were $1.7 billion – that represents a compound average growth rate of 15% over that ten year period. That is seriously fast growth.

Drill down deeper into this most sophisticated corner of our great agriculture export sector and you see a similar trend. Neutraceuticals and innovative foods have grown from $70m to $350m in ten years – a CAGR of 18%. This is food as nutrition and food as health. Honey exports have grown at 21% per annum since 2002 – one reason why the Government is determined to have the right regulatory frameworks in place to protect our premium brand. Beverages, led by wine, have achieved an annual export growth rate of 24% in the 15 years to 2010.

Let’s not belabour the obvious: behind the respectable, but still too slow aggregate export growth data, there are numerous ‘export gems’ performing unbelievably well in our traditional area of strength – food and beverages.

Diversifying From Agriculture? The Wrong Question

Let us first address the old argument about ‘diversifying away from agriculture’. Look, I totally get it, but the argument always has been wrong on multiple levels.

First, and most fundamentally, it is the wrong choice for NZ. The choice is not between ‘agriculture’ and ‘manufacturing’ or ‘services’, it is about the choice between resources in the traded sector and the non-traded sector. I appreciate this is a little technical: we can call the ‘traded sector’ rather loosely the ‘export sector’ as long as a few experts continue to understand that it also includes the efficient import competing sector. Without tariff protection or subsidies, a dollar saved in efficient import substitution is worth a dollar of exports. That is what the term ‘traded sector’ actually refers to.

And our global target reflects this most basic reality. We are trying to shift resources from the non-traded to the traded sector by 10 percentage points in the next 12 years to 2025. This is not a choice between exports; we want all and any exports, be they agriculture or audio visual.

The ‘anti-agriculture’ argument is also wrong because it fails to understand the unbelievably high-tech nature of modern NZ primary exports. There is still a role for high quality commodities, provided it is profitable. But more and more of our primary exports are high technology products. A modern NZ dairy farmer is far more likely to be carrying a smart phone with apps developed by LIC (one of our leading agriculture technology companies) than carrying a spade. And she may be doing this from her living room with her red boot gumboots out on the porch. No wonder, Sir Graeme Harrison called NZ agriculture ‘NZ’s Silicon Valley’.

The argument also ignores the linkage between our excellence in agriculture and our excellence in specialised manufacturing. There are numerous examples here to draw on. As Trade Minister, I meet countless brilliant NZ niche manufacturers who trace their origins to servicing the agriculture sector. Even our most successful aircraft manufacturer – Pacific Aerospace, which has exported from its Hamilton base more than 1,000 highly specialised aircraft – owes its origins to top dressing our farms.

Our Manufactured Exports: The Future is ‘Niche’

When I first became involved in our international trade strategy in the mid-1970s working in our Treasury, basically we did not export any manufactured exports. We hid behind massive import licensing and high tariff walls and did nothing that was internationally competitive.

This transition has been a tough one, but I think we are on the right track and I am very optimistic we will see an acceleration of our export performance here as well.

First, our high value manufacturing industries represented in a statistical series called the ‘TIN-100’ (to represent the 100 top high technology companies) has now attained export income of some $5 billion. Australia – no surprise here – is their fastest growing market with export growth of 7% in 2012.

One thing has become very clear – any attempt to ‘pick winners’ amongst our manufactured export companies is not only doomed to fail, it is ridiculous. Time after time, I meet outstanding NZ manufacturing companies in deeply specialised areas of the world economy that are (a) outperforming all the competition; and (b) there is no logical reason they should exist in NZ. The reason they do is because somewhere in their companies is a smart New Zealander who saw an opportunity.

I have a large filing system in my office of all the export companies I have visited since I have had the privilege of being NZ’s Trade Minister over 5 years ago. I file the reports alphabetically. I will pick the letter ‘B’ at random to make the point.

Start with ‘Buckley Systems Ltd’. This is an extraordinary company, started in 1988, and which logically should not exist. I am trained as an economist, not a physicist specialising in quantum mechanics so I don’t deeply understand their business model. All I know is the following: they export 100% of their production and enjoy a 90% market share of the global synchrotron market – my crude explanation is that they produce giant electromagnets for the semi-conductor market. Bill Buckley, the genius who built the company, dresses like a mechanic who walked out of a garage in Patararu in the Waikato. We owe a heap to him.

My next company in my file under ‘B’ is half manufacturing, half services. It is Burgerfuel Worldwide. “Get outa-my-way McDonalds: we are coming after you”. Well, OK. But we have a fair bit of territory to cover before that becomes reality, but Burgerfuel is a gourmet burger franchise that licenses its intellectual property internationally and exports value added food products, raw materials, proprietary products and store fit outs. It has a large and growing number of outlets in the Middle East. Its vision, backed by Kiwi ingenuity and 100% pure NZ ground beef, is to become the world’s dominant gourmet burger brand.

Bathhurst Resources is next on my file under ‘B’. This is an Australasian coal mining company that is firmly focussed on high quality coking coal which is highly valued because of its superior technology. Putting aside the specifics of the company, Bathurst is symptomatic of a far larger objective of this Government – to find a way that is environmentally and politically sustainable to exploit the vast mineral and mining resources of our country.

It is no good complaining that Australia has a higher per capita GDP and then refusing to exploit substantially the same resources that could help us close the gap. We are definitely making progress here: oil and gas exports have been increasing at a compound annual growth rate of 16% over the last seven years. They now account for $2.2 billion, or 4.7%, of total NZ merchandise exports. We are making gaining ground.

BCS is my next company in the file under ‘B’. By rights, you would be excused from thinking that the NZ market is too small to support even one specialised baggage handling systems company. After all, how many airports do we build each year?

You would be completely wrong. We have several highly competitive baggage handling companies and BCS is one of them. My data is out of date but when I visited them two years ago, they had 85% of the installations in Australia and NZ dealing with baggage handling. They are aiming to be a $500 million company by 2020 and I would not bet against them.

Beca Group is my next company. This is NZ’s largest privately owned engineering consultancy company that supervises an estimated $3 billion in projects annually. I have been working professionally with this company for some 20 years since I first became Ambassador in Indonesia where they were a major player.

There are other companies in my file, filed under ‘B’ but I do not want to labour the point. What I see, and I hope you see, is the strange diversity of our export effort.

Services: Our Hidden Successes

For years we worried about our services exports. Measured traditionally, they amount to about a quarter of our total ‘goods’ exports – exports of ‘things’. Secondly, we worried that our services exports were stuck at the commoditised end of the services export market and we were missing out badly at the high end ‘commercial’ or ‘business’ services markets where most of the international growth was taking place. It turns out that both these conclusions were wrong and far too pessimistic.

· First, the aggregate figure is wrong – a complete prisoner of the statistical method traditionally used internationally to measure trade in services. There has been some brilliant work done recently here by the OECD and WTO to measure services by value added – a far more realistic methodology. And it turns out that our services exports share of total NZ export virtually doubles to some 46% of total NZ exports. The reason is finally straightforward: every export of ‘goods’ incorporates a significant service component. The barrier between trade in goods and trade in services is becoming more and more porous.

· Second, our earlier pessimistic conclusion is wrong: our commoditised services exports are indeed going sideways, but this is being seriously offset by huge success in ramping up our high-end commercial services. These are services exports like audio-visuals, architecture, Government IP and knowhow, factoring and so forth. These exports are now growing at a compound average growth rate of over 10% per annum and now account for some 30% of total NZ services exports.

Let me give you simply one practical example: Metservice, an SOE based in Wellington. Its core business ins software solutions for weather forecasting. It has 240 employees with offices in Sydney, Hong Kong and the UK. How could this be an important services exporter?

Well, I would not say ‘very simply’ – but rather, with very sophisticated strategies of the type they are pursuing. Metservice are probably the most efficient weather forecaster in the world. They sell their services to the BBC, Energy Traders, Marks & Spencer and Tesco. Marks & Spencer? They need weather forecasting? Well yes. If you were running these giant retailers, you might also want to predict for your supply chains whether you need to stock up on ice-cream or air-conditioners. This is part of our future.

Conclusion

Ladies and Gentlemen, there is a huge agenda I have not touched on today – the close linkage between enhanced export performance and domestic policy. It is fundamental. If we want to increase our agriculture exports we need to
lift our game on PPP irrigation as simply one example of the need to invest in innovation; second, to build on our extraordinary success in audio visual services exports, we need ultra-fast broadband, the ‘super-highways’ of the 21st Century.

This, I am sure, you understand. But my key messaging is around the following:

· Given the massive obstacles of the Global Financial Crisis (the worst recession in 70 years) and our high dollar, we have made significant progress in spite of the headwinds.

· Beyond the respectable, but still insufficient aggregate growth figures, there are all manner of what I call ‘export gems’ in agriculture, niche manufacturing and services that we should celebrate. Let us work with success. I fully expect most of these to out-perform the average over the next decade. There is every reason for optimism that we can lift our export game.